Case No. D2/16 Profits tax - Gov · Case No. D2/16 . Profits tax – locality of profits double...

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(2016-17) VOLUME 31 INLAND REVENUE BOARD OF REVIEW DECISIONS 316 Case No. D2/16 Profits tax – locality of profits – double taxation – sections 2, 14 and 68(4) of Inland Revenue Ordinance Panel: Chow Wai Shun (chairman), Mun Lee Ming Catherine and Yuen Miu Ling Wendy. Dates of hearing: 13 and 14 October 2015. Date of decision: 18 April 2016. The Appellant was a company incorporated in Hong Kong. Company G was a limited liability company incorporated in Mainland China and was a foreign investment enterprise wholly owned by the Appellant. The Appellant and Company G were separate legal entities and separate taxable entities, and they operated an import processing arrangement under which the Appellant would purchase raw materials from suppliers for sale to Company G and in turn purchase finished products from Company G for sale to customers. The Appellant earned its profits by selling raw materials to Company G and selling products to customers. It was not in dispute that the profits generated form the manufacturing operations of Company G, which only took place in Mainland China, should not be taken into account in determining the locality of the Appellant’s profits and be subject to Hong Kong profits tax. The crux of the issue was whether the profits earned from the sale of the finished products by the Appellant to the customers in Mainland China arose offshore and should not therefore be subject to Hong Kong profits tax. The Appellant also sought to argue that the assessments were incorrect or excessive because the prices for the raw materials sold by the Appellant to Company G and for the finished products bought by the Appellant from Company G, were not fair prices at arm’s length. The Appellant’s contention essentially sought to argue that the prices in those transactions between the Appellant and Company G as associated enterprises had in fact been ‘inflated’ such that the Appellant had earned more profits assessable to tax in Hong Kong than it should have been. Held: 1. The transactions between the Appellant and Company G in respect of the sale of raw materials to Company G to produce the finished products for sale to the Appellant and the acquisition of the finished products from Company G, were concluded by the Appellant in Hong Kong.

Transcript of Case No. D2/16 Profits tax - Gov · Case No. D2/16 . Profits tax – locality of profits double...

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Case No. D2/16 Profits tax – locality of profits – double taxation – sections 2, 14 and 68(4) of Inland Revenue Ordinance Panel: Chow Wai Shun (chairman), Mun Lee Ming Catherine and Yuen Miu Ling Wendy. Dates of hearing: 13 and 14 October 2015. Date of decision: 18 April 2016. The Appellant was a company incorporated in Hong Kong. Company G was a limited liability company incorporated in Mainland China and was a foreign investment enterprise wholly owned by the Appellant. The Appellant and Company G were separate legal entities and separate taxable entities, and they operated an import processing arrangement under which the Appellant would purchase raw materials from suppliers for sale to Company G and in turn purchase finished products from Company G for sale to customers. The Appellant earned its profits by selling raw materials to Company G and selling products to customers. It was not in dispute that the profits generated form the manufacturing operations of Company G, which only took place in Mainland China, should not be taken into account in determining the locality of the Appellant’s profits and be subject to Hong Kong profits tax. The crux of the issue was whether the profits earned from the sale of the finished products by the Appellant to the customers in Mainland China arose offshore and should not therefore be subject to Hong Kong profits tax. The Appellant also sought to argue that the assessments were incorrect or excessive because the prices for the raw materials sold by the Appellant to Company G and for the finished products bought by the Appellant from Company G, were not fair prices at arm’s length. The Appellant’s contention essentially sought to argue that the prices in those transactions between the Appellant and Company G as associated enterprises had in fact been ‘inflated’ such that the Appellant had earned more profits assessable to tax in Hong Kong than it should have been. Held:

1. The transactions between the Appellant and Company G in respect of the sale of raw materials to Company G to produce the finished products for sale to the Appellant and the acquisition of the finished products from Company G, were concluded by the Appellant in Hong Kong.

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2. When ascertaining what were the operations which produced the

relevant profits and where the operations took place, it is the operations of the taxpayer, and not those of the taxpayer’s subsidiary or subcontractor, which are relevant. Whilst Company G might have been engaged in soliciting sales from potential customers, such activities could have been attributed to Company G’s own activities of soliciting customers for itself, since if Company G was able to make a potential customer purchase materials from the Appellant, such purchase would equally benefit Company G as this would entail the Appellant engaging Company G to manufacture the finished products. This Board is therefore not convinced that Company G was acting as agent for the Appellant in soliciting sales from potential customers.

3. The fact that Company G or the staff members of Company G or the

Appellant stationed in Mainland China had performed the roles of following up orders with the customers and managing the sales process did not make the source of the disputed profits offshore. All these activities were simply antecedent or incidental to the Appellant’s profit-producing transactions.

4. Further, if Company G or any staff member acting in the name of Company G was an agent of the Appellant in Mainland China with authority to bind the Appellant to contracts with customers, this would possibly expose the Appellant to tax risk in Mainland China. The absence of any evidence that the Appellant had been made subject to, and indeed paid, any enterprise income tax in Mainland China, further reinforced that neither Company G nor any staff member acting in the name of Company G was such an agent.

5. In Hong Kong, Article 9(2) of the Arrangement between the Mainland China and Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income provides for an appropriate downward adjustment to the amount of tax charged on profits to the Appellant in Hong Kong where any proportion of such profits has already been included in the profits of Company G and taxed as such in Mainland China.

6. Pursuant to paragraph 26 of the Departmental Interpretation and Practice Notes No 46 (‘DIPN 46’) issued by the Inland Revenue Department on 4 December 2009, the adjustment, which may be undertaken as part of the mutual agreement procedure between Mainland China and Hong Kong, can mitigate or eliminate double taxation where one tax administration makes a primary upward adjustment as a result of applying the arm’s length principle to transactions involving an associated enterprise in the other side.

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7. Pursuant to paragraph 71 of DIPN 46, an enterprise cannot unilateral apply and transfer pricing methodology to reduce profits arising in or derived from Hong Kong. The Respondent is not obligated to make a downward adjustment where the Mainland tax authorities have not made any upward adjustment on Company G. Given the absence of any upward adjustment having been made by the Mainland tax authorities, there is no basis for considering a downward adjustment to the profits assessed in Hong Kong as contended by the Appellant.

Appeal dismissed. Cases referred to:

Commissioner of Inland Revenue v Hang Seng Bank Limited [1991] 1 AC 306 Commissioner of Inland Revenue v HK-TVB International Limited [1992] 2 AC

397 Kwong Mile Services Limited v Commissioner of Inland Revenue [2004] 7

HKCFAR 275 ING Baring Securities (Hong Kong) Ltd v Commissioner of Inland Revenue

[2008] 1 HKLRD 412 Commissioner of Inland Revenue v Datatronic Ltd [2009] 4 HKLRD 675

Au Yeung Tin Wah, Wong Chiu Yee and Cheung Tung Yung of Messrs Lau & Au Yeung

CPA Limited, for the Appellant. Katherine Chan, Government Counsel, Edith Tam, Government Counsel and Iva Lo of

Department of Justice and Chan Siu Ying Shirley, Senior Assessor, for the Commissioner of Inland Revenue.

Decision: 1. The Appellant lodged an appeal against the determination of the Deputy Commissioner of Inland Revenue dated 13 February 2015 (‘the Determination’) dismissing the Appellant’s objection to the Additional Profits Tax Assessments for the years of assessment 2002/03 to 2006/07 and the Profits Tax Assessments for the years of assessment 2007/08 and 2008/09 raised on it. Appellant’s application to re-schedule the hearing 2. Less than a week before the scheduled hearing of this appeal, on 7 October 2015, the representative of the Appellant, Messrs Lau & Au Yeung CPA Limited (‘the Representative’), wrote to the Clerk to this Board, requesting that the hearing be rescheduled. The reason proffered was that Mr Au Yeung of the Representative who was in charge of this appeal ‘suddenly’ had to ‘join an important multinational meeting in Beijing from 12 to 15 October 2015 for business purpose’. With the letter, the

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Representatives enclosed an invitation letter, copies of air tickets and hotel vouchers. We sought views from the Respondent on the Appellant’s request. The Respondent, via the Department of Justice, objected to the request. Having considered the circumstances, we rejected the Appellant’s request. We indicated that we would include in our decision the reasons for disallowing the request, which we now do. 3. At an earlier request of the Appellant via its Representative, this hearing was scheduled for 3 afternoons. The Appellant and its Representative were duly informed of the hearing dates by a letter dated 20 May 2015, more than 5 months in advance of the scheduled hearing. On the other hand, the invitation to the event was dated 30 September 2015 and was addressed to the customers of the organiser generally. It was a half-day meeting (or seminar) held in City A in the morning of 14 October 2015, which was the second day of the scheduled hearing. When Mr Au Yeung received the invitation on 30 September 2015 or thereabouts, he, being the person in charge of this appeal for the Appellant, should have been fully aware that the seminar would clash with the hearing dates, and yet he chose to book the air ticket and hotel accommodation. He also chose to only make a request to this Board for rescheduling the hearing some days later on 7 October 2015. 4. We consider the way that Mr Au Yeung handled this matter unacceptable. The appeal involved a number of parties, including his own client. We could hardly imagine how a professional could just go around expecting that everyone and everything else would necessarily accommodate his own schedule and affairs. As there was no justifiable reason for the Appellant’s request, the request was rejected. Facts 5. We found the relevant background facts as follow.

(a) The Appellant is a private company incorporated in Hong Kong in

September 1992. At all relevant times, the Appellant’s business address was in Hong Kong with its facsimile number also in Hong Kong. It closed its annual accounts on 31 March.

(b) In its Profits Tax returns, the Appellant declared its principal

activities as follows:

Year(s) of assessment Principal activities 2002/03 to 2005/06 Manufacturing and trading of paper carton

boxes and boards 2006/07 to 2007/08 Manufacturing and retailing of carton

boxes 2008/09 Manufacturing and trading of paper carton

products

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(c) The Appellant’s directors at the relevant times were:

Name Date of appointment Mr B 10 December 1992 Ms C 10 December 1992 Mr D 16 March 2006 Mr E 16 March 2006 Mr F 16 March 2006

(d) Company G is a limited liability company incorporated in Mainland

China in May 1993. It was a foreign investment enterprise (外商投

資企業) wholly owned by the Appellant. (e) The articles of memorandum (章程) of Company G contained,

among other things, the following clauses:

(i) The total investment in Company G was US$3 million and the registered capital was US$2.1 million. The total investment was made up of cash of US$500,000, equipment of US$1,700,000 and factory premises, infrastructure, land, etc. in the total amount of US$800,000.

(ii) The business of Company G was the manufacture of carton

paper products and the sale of own-manufactured goods. 70% and 30% of the products of Company G would be sold to customers outside and inside Mainland China respectively.

(iii) Company G had to prepare its own accounts in accordance with the laws and accounting principles of Mainland China.

(iv) Company G had to pay tax and claim exemption in accordance with the laws of Mainland China.

(v) To engage Mainland China employees, Company G had to abide by the laws and make written agreements setting out the provisions concerning employment, termination, remuneration, insurance and discipline.

(f) A certificate of registration (H 市外商投資企業核准登記通知書)

dated 17 May 1993 was issued for the establishment of Company G on 6 May 1993. The certificate stated that Company G had obtained business registration and had the status of a legal person with the following particulars:

Effective Term : 6 May 1993 to 6 May 2043 Managing Director : Mr B

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Deputy Managing Director : Ms C General Manager : Mr E Persons employed : 150

(g) A certificate of approval dated 16 April 2004 was issued to

Company G, which stated that the total investment of US$470 million and capital of US$329 million were wholly contributed by the Appellant.

(h) The Appellant furnished Profits Tax Returns for the years of

assessment 2002/03 to 2008/09 with financial statements for the years ended 31 March 2003 to 2009 and tax computations.

(i) In the returns, the Appellant declared the following assessable

profits:

(ii) The Appellant deducted the following amounts in arriving at

the declared assessable profits:

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 $ $ $ $ $ $ $

Offshore profits 55,105 3,710,484 3,004,577 7,481,296 16,873,314 8,163,288 15,541,409 Industrial building

allowance 1,213,458 1,058,554 864,179 656,551 778,199 776,344 693,237

Depreciation allowance

859,379 402,783 805,254 923,715 850,713 363,462 135,675

Capital expenditure on prescribed fixed assets

4,567,305 1,293,852 3,562,247 4,294,243 3,134,648 7,769,806 2,160,543

(iii) The Appellant included sale proceeds of prescribed fixed

assets of $8,000 and $69,000 in the declared assessable profits for the years of assessment 2003/04 and 2008/09 respectively.

(iv) The detailed profit and loss accounts for the years ended 31 March 2003 to 2009 showed the following particulars:

Year ended 31 March

2003 2004 2005 2006 2007 2008 2009

$ $ $ $ $ $ $ Sales 95,527,637 96,640,076 104,531,404 95,312,020 118,972,784 133,479,690 150,532,210 Sales discounts

and return (3,038,836) (280,555) (437,241) (345,134) (304,282) (106,577) (132,882)

92,488,801 96,359,521 104,094,163 94,966,886 118,668,502 133,373,113 150,399,328 Less: Cost of sales Opening inventory 7,198,942 11,612,706 19,929,450 15,642,601 12,724,893 17,746,976 32,739,313 Purchases 66,019,770 70,563,072 60,926,325 45,440,022 61,146,256 86,773,739 62,588,515

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 $ $ $ $ $ $ $ Assessable Profits 9,564 582,318 444,796 1,501,469 3,203,209 1,795,584 4,764,867

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Year ended 31 March

2003 2004 2005 2006 2007 2008 2009

$ $ $ $ $ $ $ Closing inventory (11,612,706) (19,929,449) (15,642,601) (12,724,893) (17,746,977) (32,739,313) (17,199,623) 61,606,006 62,246,329 65,213,174 48,357,730 56,124,172 71,781,402 78,128,205 Transportation and

coolie hire 1,653,669 1,381,473 1,783,492 2,611,373 3,112,426 3,731,758 5,384,151

Mainland production cost

13,669,860 15,045,121 11,101,531 9,034,517 9,614,693 10,434,939 11,286,629

Wages - - 5,337,384 6,914,069 8,342,000 9,997,808 10,795,405 Staff messing and

welfare - - 1,010,609 756,344 415,392 481,442 445,575

Consumable stores 353,373 538,136 784,272 324,225 678,382 61,550 414,356 Ink and glue 1,750,746 2,570,771 2,534,213 3,680,889 4,540,758 5,729,114 5,450,187 Insurance - 20,780 8,558 3,378 - - - Testing fee 14,289 13,012 8,835 7,039 - - - Depreciation 3,363,865 3,630,100 4,274,312 4,288,032 4,583,186 4,848,174 5,369,051 82,411,808 85,445,722 92,056,380 75,977,596 87,411,009 107,066,187 117,273,559 Gross profit 10,076,993 10,913,799 12,037,783 18,989,290 31,257,493 26,306,926 33,125,769 Other Revenue 92,420 189,251 222,382 294,405 108,600 155,574 84,368 10,169,413 11,103,050 12,260,165 19,283,695 31,366,093 26,462,500 33,210,137 Less: Operating

expenses 7,203,074 8,374,674 8,036,346 8,915,677 11,356,430 14,251,300 15,855,797

Profit for the year 2,966,339 2,728,376 4,223,819 10,368,018 20,009,663 12,211,200 17,354,340

(v) The Appellant divided sales and gross profit into the following components:

Sales Year ended 31 March 2003 2004 2005 2006 2007 2008 2009 $ $ $ $ $ $ $ Carton box sales in

Hong Kong 22,238,201 19,445,688 22,224,419 31,556,577 37,974,056 48,131,191 70,617,983

Carton box sales in Mainland China

38,454,688 50,298,838 62,268,331 62,967,186 80,998,728 85,348,499 79,914,227

Carton board sales in Mainland China

34,834,748 26,895,550 20,038,654 788,257 - - -

95,527,637 96,640,076 104,531,404 95,312,020 118,972,784 133,479,690 150,532,210

Gross profit Year ended 31 March 2003 2004 2005 2006 $ $ $ $ Carton box sales in Hong Kong

2,865,280 29.58% 2,961,299 27.13% 3,103,981 25.79% 6,347,446 33.43%

Carton box sales in Mainland China

4,954,755 51.14% 7,657,009 70.16% 8,696,141 72.24% 12,629,904 66.51%

Carton board sales in Mainland China

1,867,906 19.28% 295,491 2.71% 237,661 1.97% 11,940 0.06%

9,687,941 100.00% 10,913,799 100.00% 12,037,783 100.00% 18,989,290 100% Year ended 31 March 2007 2008 2009 $ $ $ Carton box sales in Hong Kong 9,975,334 31.91% 9,484,691 36.06% 15,542,622 46.93% Carton box sales in Mainland China 21,282,158 68.09% 16,822,235 63.94% 17,583,147 53.07% 31,257,493 100.00% 26,306,926 100.00% 33,125,769 100.00%

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(vi) The Appellant claimed that, according to Departmental Interpretation and Practice Notes No. 21, 100% of the profits from sale of carton boxes and carton boards in Mainland China should be exempt from Profits Tax and that 50% of the profits from sale of carton boxes in Hong Kong should be exempt from Profits Tax.

(i) Pending a review of the Appellant’s offshore claim, the Assessor

raised 2002/03 to 2006/07 Profits Tax Assessments on the Appellant in accordance with the tax returns. The Appellant did not object to the assessments, which had become final and conclusive in terms of section 70 of the Inland Revenue Ordinance (‘the Ordinance’).

(j) In reply to the Assessor’s enquiry, the Representative made certain

claims, explained the business operations, as well as provided information and documentation of certain sample transactions. We are going to deal with these later in our decision.

(k) The Assessor was of the view that the Appellant’s profits for the

year of assessment 2003/04 should be fully chargeable to Profits Tax and raised on the Appellant the following Additional Profits Tax Assessment:

Year of Assessment 2003/04 (Additional) Additional Assessable Profits [paragraph 5(h)(ii)] $3,710,484 Additional Tax Payable thereon $649,335

(l) The Appellant, through the Representative, objected to the 2003/04

Additional Profits Tax Assessment, reiterating its offshore claim and asking for depreciation allowances for capital expenditure incurred for certain plant and machinery.

(m) The Representative provided the audited financial statements of

Company G for the years ended 31 December 2002 to 2008. The financial statements were audited by Company J. In the auditor’s report, the auditor expressed the opinion that the financial statements complied with the Enterprise Accounting Standards (企業會計準則) and Enterprise Accounting System (企業會計制度) and fairly reflected all the major aspects of Company G’s financial position, operating result and change in cash position (在所有重大

方面公允地反映了公司的財務狀況及經營成果及現金變動情況). The audited financial statements of Company G showed the following particulars:

(i) Profit statement (利潤表)

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Year ended 31 December

2002 2003 2004 2005 2006 2007 2008 2009

RMB RMB RMB RMB RMB RMB RMB RMB Main business income

(主營業務收入) 66,297,200 72,444,328 100,335,857 88,796,931 87,376,711 91,248,350 103,150,141 99,866,052

Main business cost (主營業務成本)

60,231,682 65,820,811 92,368,303 79,271,569 74,890,807 82,253,043 96,682,497 90,617,493

Business profit /

(Business loss) (營業利潤 /〔營業

虧損〕)

2,807,853 2,386,786 2,610,381 3,294,675 4,630,447 3,235,481 (2,076,300) 1,171,914

Total profit / (Total loss) (利潤總額 /〔虧損

總額〕)

2,787,553 2,354,753 2,591,559 3,243,532 4,432,774 3,227,065 (2,338,095) 1,136,434

Enterprise tax (所得

稅) 418,133 354,483 388,884 486,555 668,746 485,322 - -

Net profit/(Net loss) (浄利潤 /〔浄虧損〕)

2,369,420 2,000,270 2,202,675 2,756,978 3,764,028 2,741,743 (2,338,095) 1,136,434

(ii) Breakdown of main business income

Year ended 31 December

2002 2003 2004 2005 2006 2007 2008 2009

RMB RMB RMB RMB RMB RMB RMB RMB Export sales

(出口銷售) 64,688,350 62,084,902 83,863,454 78,503,344 72,234,003 65,359,553 77,490,272 79,134,730

General sales (一般銷售)

1,608,850 10,359,426 16,472,403 10,293,587 15,142,708 25,888,797 25,659,869 20,748,381

Total sales (銷售總額)

66,297,200 72,444,328 100,335,857 88,796,931 87,376,711 91,248,350 103,150,141 99,883,111

(iii) Notes to accounts - related party transactions (關聯方交易)

with the Appellant

Year ended 31 December 2005 2006 2007 2008 2009 RMB RMB RMB RMB RMB Sale of goods (銷售貨物) 78,503,344 72,234,003 65,359,553 77,490,272 79,134,730 Purchase of goods (採購貨物) 46,694,353 20,622,553 37,831,671 48,615,227 54,924,047 Account receivable (應收帳款) 9,541,837 12,798,388 - - 1,599,976 Account payable (應付帳款) - - 3,563,036 5,751,282 -

Notes

(1) No related party transactions were disclosed for the years ended 31 December 2002 to 2004. (2) The notes to accounts stated that, if the price adopted for the related party transactions was higher or

lower than the price for general transactions, the fairness of the price adopted should be stated.

(n) The Representative claimed that the export sales (出口銷售) of Company G (in paragraph 5(m)(ii)) comprised the following items:

Year ended 31 December

2002 2003 2004 2005 2006 2007 2008

RMB RMB RMB RMB RMB RMB RMB Transfer between factories (轉廠)

46,553,028 45,032,102 65,207,083 54,157,905 43,637,622 38,382,734 36,414,056

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Year ended 31 December

2002 2003 2004 2005 2006 2007 2008

RMB RMB RMB RMB RMB RMB RMB Export (出口) 18,135,322 17,052,800 18,656,371 24,345,438 28,596,381 26,976,819 41,076,216 Total 64,688,350 62,084,902 83,863,454 78,503,344 72,234,003 65,359,553 77,490,272

(o) The Assessor raised on the Appellant the following Additional Profits Tax Assessments for the years of assessment 2002/03 and 2004/05 to 2006/07 and Profits Tax Assessments for the years of assessment 2007/08 and 2008/09:

2002/03

(Additional) 2004/05

(Additional) 2005/06

(Additional) 2006/07

(Additional) 2007/08 2008/09

$ $ $ $ $ $ Profit per return [paragraph 5(h)(i)] 9,564 444,796 1,501,469 3,203,209 1,795,584 4,764,867 Add:

Offshore profits [paragraph 5(h)(ii)]

55,105 3,004,577 7,481,296 16,873,314 8,163,288 15,541,409

Industrial building allowance [paragraph 5(h)(ii)]

1,213,458 864,179 656,551 778,199 776,344 693,237

Capital expenditure on prescribed fixed assets [paragraph 5(h)(ii)]

4,567,305 3,562,247 4,294,243 3,134,648 7,769,806 2,160,543

Sale proceeds of prescribed fixed assets [Fact 5(h)(iii)]

-

-

-

-

-

(69,000)

Total profits [A] 5,845,432 7,875,799 13,933,559 23,989,370 18,505,022 23,091,056 Percentage of sales in Mainland China

[B] [Fact 5(h)(v)] (70.42%) (74.21%) (66.57%) (68.09%) (63.94%) (53.07%)

Less: Offshore profits [A x B] 4,116,353 5,844,630 9,275,570 16,334,362 11,832,111 12,259,041 Assessable Profits 1,729,079 2,031,169 4,657,989 7,655,008 6,672,911 10,832,015 Less: Profits previously assessed 9,564 444,796 1,501,469 3,203,209 Additional Assessable Profits 1,719,515 1,586,373 3,156,520 4,451,799 Additional Tax Payable thereon 275,122 277,615 552,391 779,065 Tax Payable thereon 1,142,759 1,787,282

(p) The Representative, on behalf of the Appellant, objected to the 2002/03 and 2004/05 to 2006/07 Additional Profits Tax Assessments and the 2007/08 and 2008/09 Profits Tax Assessments.

(q) The Assessor requested the Appellant to provide a reconciliation of

the sales amounts respectively reported in the accounts of Company G and the Appellant. The Representative replied that it was meaningless to reconcile the sales amounts and that only the accounts of the Appellant reflected the true and complete picture.

(r) The Assessor considered that the 2002/03 to 2006/07 Additional

Profits Tax Assessments and the 2007/08 and 2008/09 Profits Tax Assessments should be revised as follows:

2002/03

(Additional) 2003/04

(Additional) 2004/05

(Additional) 2005/06

(Additional) 2006/07

(Additional) 2007/08 2008/09

$ $ $ $ $ $ $ Profit per return 9,564 582,318 444,796 1,501,469 3,203,209 1,795,584 4,764,867 Add: Offshore profits 55,105 3,710,484 3,004,577 7,481,296 16,873,314 8,163,288 15,541,409

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2002/03 (Additional)

2003/04 (Additional)

2004/05 (Additional)

2005/06 (Additional)

2006/07 (Additional)

2007/08 2008/09

$ $ $ $ $ $ $ Industrial building

allowance 1,213,458 1,058,554 864,179 656,551 778,199 776,344 693,237

Capital expenditure on prescribed fixed assets

4,567,305 1,293,852 3,562,247 4,294,243 3,134,648 7,769,806 2,160,543

Deprecation allowance 859,379 402,783 805,254 923,715 850,713 363,462 135,675 6,704,811 7,047,991 8,681,053 14,857,274 24,840,083 18,868,484 23,295,731 Less: Depreciation allowance

[Appendix J2 to the Determination]

436,399 173,235 235,368 706,532 726,892 145,878 70,076

Capital expenditure on prescribed fixed assets [Appendix J1 to the Determination]

- - 33,200 204,142 141,099 - -

Sale proceeds of prescribed fixed assets [paragraph 5(h)(iii)]

-

8,000

-

-

-

-

69,000

Total profits 6,268,412 6,866,756 8,412,485 13,934,600 23,947,492 18,722,606 23,156,655 Less: Profit/(Loss) of

Company G 12,525,750 22,270,463 32,594,781 43,380,763 54,068,152 61,919,456 7(1,664,189)

Revised Assessable Profits

3,742,662 4,596,293 5,817,704 10,553,837 19,879,340 16,803,150 21,492,466

Less: Profits previously assessed

9,564 582,318 444,796 1,501,469 3,203,209

Revised Additional Assessable Profits

3,733,098 4,013,975 5,372,908 9,052,368 16,676,131

Revised Additional Tax Payable thereon

597,295 702,446 940,259 1,584,164 2,918,323

Revised Tax Payable thereon

2,915,551 3,546,256

Notes See paragraph 5(m)(i). Profit / (Loss) of Company G to be excluded = {Profit/(Loss) before tax x 9/12 [1 April to 31 December for a year] + Profit/(Loss) before tax x 3/12 [1 January to 31 March for the next year]} ÷ exchange rate (1) (RMB2,787,553 x 9/12 + RMB2,354,753 x 3/12) ÷ 1.060815 (exchange rate: HKD100 =

RMB106.0815) (2) (RMB2,354,753 x 9/12 + RMB2,591,559 x 3/12) ÷ 1.063199 (3) (RMB2,591,559 x 9/12 + RMB3,243,532 x 3/12) ÷ 1.061574 (4) (RMB3,243,532 x 9/12 + RMB4,432,774 x 3/12) ÷ 1.047350 (5) (RMB4,432,774 x 9/12 + RMB3,227,065 x 3/12) ÷ 1.015534 (6) (RMB3,227,065 x 9/12 - RMB2,338,095 x 3/12) ÷ 0.956404 (7) [(RMB2,338,095) x 9/12 + RMB1,136,434 x 3/12] ÷ 0.88299

(s) The Representative disagreed with the proposed revised assessments set out above. The Deputy Commissioner issued the Determination, confirming the revised assessments.

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Grounds of appeal 6. The Appellant’s grounds of appeal as per its Statement of the Grounds of Appeal can be summarised as follows:

(a) Its assessable profits should not be arrived at by simply deducting the profits shown in the audited accounts of Company G from its consolidated profits, but should be arrived at by using the OECD Transfer Pricing Guidelines in Departmental Interpretation and Practice Notes No 46. This was so because the inter-company trading transactions between the Appellant and Company G shown in the audited financial statements of Company G did not reflect the commercial reality and were not stated at fair prices and hence, adjustment for transfer pricing ought to have been made.

(b) The operations producing the profits from sales to the customers in

Mainland China were not carried out by the Appellant in Hong Kong. Specifically, Company G was in substance the agent of the Appellant in Mainland China to solicit, negotiate with and receive sales orders from customers there. It also claimed that the disputed profits were not wholly reflected in the accounts of Company G, and that they should be taken into account as offshore profits of the Appellant.

(c) The depreciation allowance in the revised assessments was

incorrectly calculated. Specifically, the Appellant contended that the depreciation of the fixed assets incurred by Company G had been added back twice and thus the assessable profits in the revised assessments were overstated accordingly.

7. In its Statement of Facts submitted together with its Grounds of Appeal, the Appellant also raised, inter alia, that there were arithmetical errors in the revised additional Profits Tax Assessments in the years of assessments 2005/06, 2006/07 and 2008/09. Specifically, with regard to the years of assessments 2005/06 and 2006/07, there were arithmetical errors in calculating the Total Profits, and hence the Revised Assessable Profits, the Revised Additional Assessable Profits and the Revised Additional Taxes Payable in respect of those years. In relation to the year of assessment 2008/09, there was arithmetical error in calculating the annual allowance for the 30% pool of assets, and hence the Total Profits, the Revised Assessable Profits and the Revised Tax Payable for that year. 8. During his oral opening submission at the hearing, in relation to Ground (b), Mr Au Yeung put forward a new basis for its argument that the profits generated from the sales activities in China should be treated as offshore profits, namely the Appellant had assigned a few staff members to work in Mainland China to deal with its sales activities there. Miss Chan for the Respondent objected to this on the basis that it was an additional ground of appeal, for which the Board’s consent was required under section 66(3) of the

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Ordinance before the additional ground could be relied upon. We reserved our decision on this issue, which we shall deal with in our analysis below, and directed the parties to proceed on the basis that the additional ground be heard de bene esse before we finally determined on its admissibility. Witnesses 9. The Appellant called three witnesses to testify. They were: Mr B, Mr E and Mr D. Written statements by these witnesses were submitted before the hearing. 10. Mr B had been a director of the Appellant since 1992. He also confirmed in his testimony that he was the legal representative of Company G and spent 3 days a week in Mainland China during the relevant years of assessment. His statement is the most detailed, compared with the statements of the other two witnesses. 11. Mr E and Mr D had been two other directors of the Appellant since 2006. Their statements focused more on two sample transactions in Mainland China, documentation of which had been submitted to this Board prior to the hearing. In cross-examination, Mr E confirmed that he was also the general manager of Company G. Mr D, in examination-in-chief, confirmed that he was a manager of the production division during the relevant years of assessment, and that he had no knowledge of how the price for the transactions between the Appellant and Company G were set and how the sales were conducted. 12. As will be dealt with specifically and explained in our analysis below, the statements for the Appellant are of little evidential value and do not take the Appellant’s case much further. Our analysis 13. We deal with the so-called ‘additional’ ground as opposed by Miss Chan first. ‘Additional’ ground 14. In her submission, Miss Chan objected that the Appellant should be allowed to rely on the sales activities alleged to have been carried out by its staff members assigned to work in Mainland China (‘assigned staff members’) through the medium of Company G to support its Ground (b) of the appeal. Miss Chan submitted that such contention went beyond the scope of Ground (b) and amounted to a new ground necessitating investigations of whether the profits generated from the sales carried out through the assigned staff members should be treated as offshore profits. 15. In our view, the alleged sales activities claimed to be conducted by the assigned staff members do not represent a new ground of appeal, but rather new allegations and facts concerning Ground (b) of the appeal. Such allegations and facts were only disclosed to the Respondent and this Board in the opening submission of the

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Representative on the first day of the hearing. Given the lateness of such submission and in the absence of any good justification or explanation from the Appellant for the delay, this Board decides that such new allegations and facts be excluded. 16. In the event that this Board was wrong in excluding the new allegations and facts, this Board do not consider such additional facts and allegations would affect the outcome of this appeal. As will be discussed below, the activities of the alleged assigned staff members were only simply antecedent or incidental to the Appellant’s profit-producing transactions. 17. Before we go further, we remind ourselves that under section 68(4) of the Ordinance, the Appellant has the burden of proving that the assessments are excessive or incorrect. We now turn to Ground (b). Ground (b) 18. Section 14 of the Ordinance provides that profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business. In other words, only profits of a business carried on in Hong Kong also sourced in Hong Kong are taxable. 19. Section 2 of the Ordinance defines, inter alia, the phrase ‘profits arising in or derived from Hong Kong’ to include, without in any way limiting its meaning, all profits from business transacted in Hong Kong, whether directly or through an agent. 20. In determining the source of profits, the broad guiding principle as laid down by Lord Bridge in CIR v Hang Seng Bank Limited [1991] 1 AC 306, and subsequently expanded by Lord Jauncey in CIR v HK-TVB International Ltd [1992] 2 AC 397, is ‘one looks to see what the taxpayer has done to earn the profits in question and where he has done it’. It is a question of fact depending on the nature of the transaction. One of the examples cited by Lord Bridge was: ‘if the profit was earned… by buying and reselling at a profit, the profit will have arisen in or derived from the place where… the contracts of purchase and sale were effected.’ Accordingly, the fundamental test is what the operations of the taxpayer were from which the profits in substance arose. There are thus two limitations: (i) the operations in question must be the operations of the taxpayer; and (ii) the relevant operations do not comprise the whole of the taxpayer’s operations but only those which produce the profit in question. 21. In Kwong Mile Services Limited v CIR [2004] 7 HKCFAR 275 referred to in ING Baring Securities (Hong Kong) Limited v CIR [2008] 1 HKLRD 412, Mr Justice Bokhary PJ (as he then was) observed at page 283 that Lord Bridge’s broad guiding principle was not intended to be a universal test for ascertaining the source of profit. When undertaking the exercise, he emphasised the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters.

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22. The broad guiding principle and the observations of Mr Justice Bokhary PJ (as he then was) have thereafter been consistently applied and referred to in various court cases including in CIR v Datatronic Limited [2009] 4 HKLRD 675, a Court of Appeal case cited by both parties. 23. We agree with Miss Chan and took the view that the case authorities cited above apply to the case before us. In particular, the Court of Appeal in Datatronic held that ‘whatever work undertaken by the (taxpayer) to assist the seller in preparing the goods and supplying them to the (taxpayer), even though commercially essentially to the operations and profitability of the (taxpayer’s) business, are merely antecedent or incidental to the transactions which generated the profits’ (paragraphs 21-23). Tang VP (as he then was) illustrated this with reference to the following example:

‘26. … Suppose a company in Hong Kong sells raw materials at cost to an unrelated factory in the Mainland so that they would be used by the unrelated factory to produce the product which, in turn, was sold to the Hong Kong company, which then sold the product in Hong Kong at a profit…. [T]he profit… would be attributable to its sale of the finished products in Hong Kong. Let us further suppose that to ensure the product’s quality, the Hong Kong company not only supplied the raw materials at costs but had also posted a number of staff to the Mainland factory to provide technical or other assistance as may be necessary. We do not believe that that would make any difference. Nor, for that matter, the fact that the Mainland factory happened to be a wholly-owned subsidiary of the Hong Kong company, and as such the Hong Kong company was able to procure the wholly-owned subsidiary to sell its product to the Hong Kong company at cost.’

In short, technical and administrative assistance alike given by the taxpayer, even to its wholly-owned subsidiary, could not be confused as a profit-making transaction. 24. On the facts, it is not disputed that the Appellant and Company G are separate legal entities and separate taxable entities, and that the Appellant and Company G operated an import processing arrangement under which the Appellant would purchase raw materials from suppliers for sale to Company G and in turn purchase finished products from Company G for sale to customers. It is also not in dispute that the Appellant earned its profits by selling raw materials to Company G and selling products to customers, and that the profits generated form the manufacturing operations of Company G, which only took place in Mainland China, should not be taken into account in determining the locality of the Appellant’s profits and be subject to Hong Kong profits tax. 25. The crux of the issue is whether the profits earned from the sale of the finished products by the Appellant to the customers in Mainland China arose offshore and should not therefore be subject to Hong Kong profits tax.

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26. As stated in the above case authorities, to decide this issue one must focus on the nature of the taxpayer’s transactions which gave rise to such profits. The transactions that produced the Appellant’s profits were the sale of the raw materials to Company G and the on-sale of the finished products acquired from Company G by the Appellant to the customers. 27. We believe that there is no dispute that the transactions between the Appellant and Company G in respect of the sale of raw materials to Company G to produce the finished products for sale to the Appellant and the acquisition of the finished products from Company G, were concluded by the Appellant in Hong Kong, and if there is any dispute about this, there is no evidence before this Board which shows that the Appellant concluded such transactions outside Hong Kong. Accordingly, such transactions took place in Hong Kong. 28. On the issue of the on-sale of the finished products by the Appellant to customers, the Appellant contended that Company G was the Appellant’s agent in Mainland China in soliciting sales from potential customers there, following up orders with such customers and managing the entire sales process. Company G performed such duties under the instructions of the management of the Appellant stationed in Mainland China. 29. In terms of evidence, the Appellant relied on two sets of sample transactions involving the sale of raw materials from the Appellant to Company G and the purchase of finished products by two customers respectively in 2003, namely Company K and Company L. These documents show that:

(a) The purchase orders for raw materials were first sent by Company G to the Appellant, two of which were clearly sent by facsimile transmission by Company G to the Appellant and bore a header evidencing that it was so sent to the facsimile number of the Appellant in Hong Kong.

(b) They were followed by the purchase orders for raw materials issued

by the Appellant, also in Hong Kong, to its suppliers, with the latter issuing their invoices to the Appellant in Hong Kong.

(c) The suppliers delivered the raw materials to Hong Kong or Mainland China as agreed with the Appellant and recorded in their invoices to the Appellant. The documents from the City H customs revealed that the Appellant was the party which imported the raw materials into Mainland China for processing by Company G.

(d) In relation to the sale of the finished products made by Company G

to Company K or Company L (as the case may be), it appears that Company G had direct dealings with them for the purpose of obtaining their initial purchase orders but ultimately the invoices evidencing the contracts of sale and purchase of the finished

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products were issued by the Appellant to these customers. These invoices billed the purchase price in Hong Kong dollars. According to Mr E and Mr D, those invoices were prepared by the staff of Company G or the staff of the Appellant in Mainland China. These staff members, however, were not called to give evidence. There is also no evidence as to from where the invoices were issued. Accordingly, we find that the Appellant had failed to establish that these invoices, which evidenced the entering into of the contracts of sale and purchase with these customers, were issued outside Hong Kong or that the Appellant’s acceptance of the purchase orders from these customers took place outside Hong Kong.

(e) Although separately some monthly statements were issued to the

customers on papers headed under the names of both the Appellant and Company G, Mr B in his oral testimony informed this Board that the monthly statements were in fact monthly statements from the Appellant to those customers.

(f) On the payment of the purchase price, these customers made

payment to the Appellant in Hong Kong through their respective related parties – Company K through Company M and Company L through a Mr N.

(g) Delivery of the finished products was made by Company G to those

customers directly, apparently pursuant to the instructions given by the Appellant.

(h) It is not disputed that the Appellant paid the price for the finished

products to Company G. 30. It is plain from the case authorities that when ascertaining what were the operations which produced the relevant profits and where the operations took place, it is the operations of the taxpayer, and not those of the taxpayer’s subsidiary or subcontractor, which are relevant. Whilst Company G might have been engaged in soliciting sales from potential customers, such activities could have been attributed to Company G’s own activities of soliciting customers for itself, since if Company G was able to make a potential customer purchase materials from the Appellant, such purchase would equally benefit Company G as this would entail the Appellant engaging Company G to manufacture the finished products. This Board is therefore not convinced that Company G was acting as agent for the Appellant in soliciting sales from potential customers. 31. Mr B in his oral testimony said that he also did negotiations with potential customers in Mainland China and took orders from those customers. However, when one looked at the purchase orders issued by the customers such as Company L, all these orders were addressed to Company G, not the Appellant. Given that Mr B ws a director of the Appellant, one would have expected him (and in fact, any staff of the Appellant who are claimed to have been assigned to work in Mainland China for the Appellant) to negotiate

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potential orders simply in the name of the Appellant as opposed to Company G. However, this is not the case here. The purchase orders from the customers like those from Company L were sent to Company G, not the Appellant, and then a formal invoice issued by the Appellant to the customers. Had Mr B or such staff been the Appellant’s agent, the interposition of Company G would not have been necessary. Similarly, one would expect Company G to simply send its order for raw materials to the staff of the Appellant claimed to have been assigned to work in Mainland China. This is again not the case, and as discussed above, such orders were sent to the Appellant in Hong Kong by facsimile transmission. 32. The Appellant’s agency argument also asserts that the fact that Company G or the staff members of Company G or the Appellant stationed in Mainland China had performed the roles of following up orders with the customers and managing the sales process made the source of the disputed profits offshore. All these activities were simply antecedent or incidental to the Appellant’s profit-producing transactions, and following the principles enunciated in the case authorities discussed above, we do not accept this assertion. 33. In the circumstances, we find neither Company G nor Mr B or any other staff member acting in the name of Company G was acting as an agent for the Appellant with authority to bind the Appellant to contracts with customers. 34. Further, if Company G or Mr B or another other staff member acting in the name of Company G was an agent of the Appellant in Mainland China with authority to bind the Appellant to contracts with customers, this would possibly expose the Appellant to tax risk in Mainland China. The absence of any evidence that the Appellant had been made subject to, and indeed paid, any enterprise income tax in Mainland China, further reinforced our views that neither Company G nor Mr B or any other staff member acting in the name of Company G was such an agent. 35. Ground (b) as a result must fail. We now turn to Ground (a). Ground (a) 36. Ground (a) relates to the computation of the Appellant’s profits. Specifically, the Appellant sought to argue that the assessments were incorrect or excessive because the prices for the raw materials sold by the Appellant to Company G and for the finished products bought by the Appellant from Company G, were not fair prices at arm’s length. In this regard, the Appellant relied on, inter alia, the OECD Transfer Pricing Guidelines and the Departmental Interpretation and Practice Notes No. 46 to support its claim for adjustment to the amount of the tax charged on the profits. 37. Putting aside all the technicalities involved in determining the arm’s length fair price, the Appellant’s contention essentially sought to argue that the prices in those transactions between the Appellant and Company G as associated enterprises had in fact been ‘inflated’ such that the Appellant had earned more profits assessable to tax in Hong Kong than it should have been. While the existence of a double taxation agreement

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is not a prerequisite for making transfer pricing adjustments, any adjustment to be made on the Hong Kong side in this case would have an impact on the tax position of Company G in Mainland China. In Hong Kong, we have the Arrangement between the Mainland China and Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (‘DTA’) which came into effect as from the year of assessment 2007/08, of which Article 9 is relevant for our purposes. 38. Article 9 of the DTA between Mainland China and Hong Kong relates to associated enterprises. It provides:

‘(1) Where:

(a) an enterprise of One Side participates directly or indirectly in the management, control or capital of an enterprise of the Other Side, or

(b) the same persons participate directly or indirectly in the

management, control or capital of an enterprise of One Side and an enterprise of the Other Side,

in any of the above situations, the commercial and financial relations between the two enterprises are different from those between independent enterprises. Accordingly, any profits which would have accrued to one of the enterprises but by reason of those relations, have not so accrued, may be included in the profits of that enterprise and taxed as such.

(2) Where One Side includes in the profits of an enterprise of that

Side – and taxes accordingly – profits of an enterprise that have been charged to tax in the Other Side and such profits are profits which would have accrued to the enterprise of that One Side had the 2 enterprises been independent enterprises under the same conditions, the Other Side shall make an appropriate adjustment to the amount of the tax charged on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Arrangement and the competent authorities of both Sides shall if necessary consult each other.’

39. In our context, Article 9(2) provides for an appropriate downward adjustment to the amount of tax charged on profits to the Appellant in Hong Kong where any proportion of such profits has already been included in the profits of Company G and taxed as such in Mainland China. 40. Pursuant to paragraph 26 of the Departmental Interpretation and Practice Notes No 46 (‘DIPN 46’) issued by the Inland Revenue Department on 4 December 2009, the adjustment, which may be undertaken as part of the mutual agreement procedure between Mainland China and Hong Kong, can mitigate or eliminate double taxation where

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one tax administration makes a primary upward adjustment as a result of applying the arm’s length principle to transactions involving an associated enterprise in the other side. 41. Pursuant to paragraph 71 of DIPN 46, an enterprise cannot unilateral apply and transfer pricing methodology to reduce profits arising in or derived from Hong Kong. The Respondent is not obligated to make a downward adjustment where the Mainland tax authorities have not made any upward adjustment on Company G. Given the absence of any upward adjustment having been made by the Mainland tax authorities, there is no basis for considering a downward adjustment to the profits assessed in Hong Kong as contended by the Appellant. 42. We have concluded above that the disputed profits are not sourced offshore and are therefore sourced in Hong Kong. In those circumstances, we consider it to be correct for the Respondent not to accept further apportionment of profits using transfer pricing. 43. Additionally, the Appellant contended that the audited accounts of Company G and some documents issued by Company G such as the export invoices, which were prepared solely to satisfy the requirements of the authorities in Mainland China, did not reflect the commercial reality and the accounts therefore were not a true reflection of the accounts of Company G. The Appellant relied on the testimony of Mr B to support such contention. 44. However, this is only a bare allegation. The Appellant was unable to produce any documents, internally kept or for accounting or tax purposes, which would show the difference between the actual prices paid in reality and the alleged unreal prices set out in the documents submitted to the customs. Accordingly, we do not accept that the prices as recorded in the accounts and documents do not reflect the prices actually charged by the Appellant or Company G, as the case may be, to the other. Further, the facts agreed include that the auditors’ report of Company G’s financial statements stated that the statements complied with the accounting standards in Mainland China. The notes to accounts on the ‘related party transactions’ between the Appellant and Company G also indicated that the transactions had adopted fair prices. 45. In the circumstances, Ground (a) fails. Ground (c) 46. This leaves us with Ground (c) which deals with calculation of depreciation allowance for the Appellant. 47. We agree with Miss Chan’s analysis that Ground (c) does not challenge the legal basis upon which depreciation allowances were made under the assessment, but instead challenges the calculation methods. The Appellant’s contention is that ‘depreciation of fixed assets incurred by Company G has been added back twice and thus the assessable profits are overstated’. We do not see it, therefore, necessary to set out the relevant provisions of the Ordinance on depreciation allowances.

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48. The Appellant’s argument runs as follows. It submitted that its accounts represented the combined accounts of itself and Company G. In arriving at the assessable profits per accounts in the relevant years of assessment, accounting depreciation charges had already been added back. According to the Appellant, such depreciation charges were shared between itself and Company G. The Appellant suggested that the profits of Company G should be deducted first from the accounting profits. It attempted to illustrate that the difference in the approaches would give rise to a difference in the amount of the assessable profits, the extent of which was exactly the same amount of the depreciation charges allocated to Company G. 49. We do not agree with the Appellant’s submission. 50. Firstly, the depreciation charges claimed to be attributable to Company G ought to have been already taken into account in Company G’s audited financial statements. In any case, if that had not been done, such depreciation charges on fixed assets owned by Company G were Company G’s own charges, and there is no legal basis for the Appellant to claim depreciation charges incurred by another entity. 51. Secondly, as to the calculation errors contended by the Appellant, in arriving at the accounting profit for each of those years of assessment, the depreciation charges said to be shared by Company G had indeed been deducted in the first place (see paragraph 5(h)(iv)). Since such depreciation charges are not qualified allowances which can be claimed by the Appellant, they should be and had been added back to arrive at the assessable profits. Therefore, there has been no double add-back of depreciation charges concerning the fixed assets owned by Company G for each of the relevant years of assessment as contended by the Appellant. 52. However, we do note a number of arithmetical errors in respect of the revised assessments in paragraph 5(r) above, as shown in the following table in bold:

2002/03

(Additional) 2003/04

(Additional) 2004/05

(Additional) 2005/06

(Additional) 2006/07

(Additional) 2007/08 2008/09

$ $ $ $ $ $ $ Profit per return 9,564 582,318 444,796 1,501,469 3,203,209 1,795,584 4,764,867 Add: Offshore profits 55,105 3,710,484 3,004,577 7,481,296 16,873,314 8,163,288 15,541,409 Industrial building

allowance 1,213,458 1,058,554 864,179 656,551 778,199 776,344 693,237

Capital expenditure on prescribed fixed assets

4,567,305 1,293,852 3,562,247 4,294,243 3,134,648 7,769,806 2,160,543

Deprecation allowance 859,379 402,783 805,254 923,715 850,713 363,462 135,675 6,704,811 7,047,991 8,681,053 14,857,274 24,840,083 18,868,484 23,295,731 Less: Depreciation allowance

[Appendix J2 to the Determination]

436,399 173,235 235,368 706,532 726,892 145,878 *101,108

Capital expenditure on prescribed fixed assets [Appendix J1 to the Determination]

- - 33,200 204,142 141,099 - -

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2002/03 (Additional)

2003/04 (Additional)

2004/05 (Additional)

2005/06 (Additional)

2006/07 (Additional)

2007/08 2008/09

$ $ $ $ $ $ $ Sale proceeds of

prescribed fixed assets [paragraph 5(h)(iii)]

-

8,000

-

-

-

-

69,000

Total profits 6,268,412 6,866,756 8,412,485 13,946,600 23,972,092 18,722,606 23,125,623

Note * The error is caused by an arithmetical error in Appendix J2 to the Determination where the annual depreciation allowance for the 30% pool assets has been mistakenly calculated at 20% only. 53. To conclude, we dismiss the Appellant’s appeal save and except to the extent of the impact on the revised additional assessable profits / revised assessable profits and the revised additional tax payable / revised tax payable caused by the errors shown in paragraph 52 above.